Many countries, including Australia, had paused their own plans to unilaterally impose a tax on the internet behemoths in the belief the OECD process was better because it would be harder to unwind and it would also prevent Trump from retaliating against individual countries. Those nations pushing hardest for a digital tax – Britain, Austria, the Czech Republic, Indonesia, Australia, Italy, Spain and France – will now have to decide whether to go it alone. Doing so could spiral into a full-blown trade war, particularly between the US and Europe.
Emmanuel Macron is in a particularly difficult position. No world leader has staked their reputation on the issue quite so much as the French President, who swept to power in 2017 with a promise to slap a 3 per cent tax on the locally generated revenues of the internet behemoths. The levy would apply to any digital firm with a global revenue of more than €750 million ($1.2 billion), of which at least €25 million was generated in France.
Macron signed the tax into law last year amid forecasts it could raise €400 million a year but Trump fired back by threatening crippling tariffs on French wine and other luxury goods.
Macron blinked in January and said France would not collect any revenue from its tax while the OECD talks were ongoing. It was a humiliating backdown Macron won’t perform for a second time, especially as elections loom in 2022.
French Finance Minister Bruno Le Maire has responded angrily to the US withdrawal, warning Paris would go ahead with its own tax.
“Whatever happens, we will apply the tax on digital giants in 2020, as it’s a question of justice,” he told French media. Le Maire agreed with the argument advanced by many economists that the tax was even more justified now because government budgets were under strain from the coronavirus pandemic and the digital economy was performing much better than most during the crisis.
OECD secretary-general Angel Gurria said the absence of a “multilateral solution” meant more countries would craft unilateral measures and “those that have them already may no longer continue to hold them back”.
Gurria said: “This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further.”
Behind the scenes though, Macron is still scrambling to salvage an international agreement. France, Britain, Italy and Spain have fired off a letter to US Treasury secretary Steven Mnuchin, floating a compromise that narrows the scope of the proposed tax.
Trump has few reasons to accept the compromise offer. He will most likely refuse it and then use a transatlantic trade war to breathe some life into his flagging re-election bid.
Bevan Shields is the Europe correspondent for The Sydney Morning Herald and The Age.